Measures Of Earnings Management Research Articles

How does corporate diversification affect earnings management? A path analysis approach

We examine whether and how corporate diversification affects earnings management. We find that diversified firms exhibit lower earnings management than comparable portfolios of single-segment firms and that the magnitude of reduction in earnings management increases with greater diversification. Using path analysis, we find that diversification decreases earnings management by reducing both earnings volatility and the need for external financing and by increasing the propensity to pay dividends. Our results are robust to using different measures of diversification and earnings management and continue to hold when we account for endogeneity using both the Heckman two-stage model and propensity score matching.

Measuring earnings management practices using the M-score Beneish model For Iraqi banks listed on the Iraq Stock Exchange

Measuring earnings management practices using the M-score Beneish model For Iraqi banks listed on the Iraq Stock Exchange

Earnings management in the family business groups of Pakistan: the role of corporate governance

Purpose This paper aims to examine the role of corporate governance (CG) in the earnings management (EM) of affiliated companies in family business groups (FBGs) listed on the Pakistan Stock Exchange (PSX), using principal–principal agency theory. Design/methodology/approach The sample of 327 nonfinancial firms of the PSX, consisting of 187 group-affiliated firms and 140 nonaffiliated firms has been used in this study for the period of 2010 to 2019. The study uses different regression models for analysis, with robustness tests of various alternative measures of EM and FBG affiliation. In addition, endogeneity is controlled with the propensity score matching method. Findings The findings show that EM is less prevalent in affiliated firms compared to nonaffiliated companies. The results show a negative and significant relationship between FBGs affiliated firms and EM. Moreover, the results also show a positive relationship between EM and the interaction term of the CG index and group affiliation. It refers to the fact that effective governance cannot reduce EM in affiliated companies of FBGs as well as in the nonfinancial companies of the PSX. In addition, the quality of CG is higher in affiliated companies compared to its counterpart in nonaffiliated firms. The findings support the principal–principal agency theory that CG cannot mitigate the expropriating behavior of controlling shareholders against minority shareholders by reducing EM in emerging markets due to the ownership concentration phenomenon. Research limitations/implications This research study has implications for small investors, government agencies and regulators. The findings of the study show that CG code should make it mandatory for companies to reveal information about their complex ownership structure and ownership information about affiliated companies and directors. Furthermore, it is suggested to revisit the code of CG in the Pakistani context of principal–principal conflict instead of the agent–principal explanation of agency theory based on Anglo–Saxon countries. Originality/value This research study has contributed to the CG and FBG literature in relation to EM in idiosyncratic settings of Pakistan. One of the prime contributions of the paper is the development of a comprehensive CG index. This research study used detailed, manually collected novel data on affiliated firms of FBGs in Pakistan.

EARNINGS QUALITY AND NATIONAL IPO: REM PRACTICES OF CENTRAL ASIA

Abstract. The study aims to assess the impact of the National IPO/SPO Program on Earnings quality in KASE-listed companies and provide recommendations to the investor community. KASE Stock Exchange sample population is 52 local companies, 26 state and 26 private, across different industries excluding financial institutions and investment holdings. Time horizon is 13 years during 2009-2021period totaling 572 unbalanced panel firm-year observations. To estimate Earnings quality, we follow Kasznik cash flow model for accrual-based Earnings management jointly with real activity Roychowdhury aggregate model. We found that the National IPO/SPO process creates partial state-owned enterprises and improve their key investment indicators. Partially state-owned companies outperform private ones and thus become the preferable investment strategy based on Earnings quality risk, cash generation, profitability and leverage-based risk. To strengthen our analysis we compare main results with another popular measurement of accrual-based Earnings management based on the Shivakumar 1996 model. We also winsorised key investment indicators to estimate the impact of outliers on the main results. Theoretically, this study is the first to analyze Earnings management from the National IPO/SPO perspective and the first to relate Earnings quality with structure ownership in case of Kazakhstan. Practically, results and discussion are useful for investors of KASE-listed companies in investment decision-making. Keywords: Earnings quality, Ownership structure, Earnings management, Kazakhstan, National IPO/SPO, KASE

BOARD FINANCIAL EXPERIENCE AND EFFICIENCY-BASED EARNINGS MANAGEMENT IN PRE- AND POST-INTERNATIONAL FINANCIAL REPORTING STANDARDS

The study examines whether the board of directors with financial experience can effectively constrain earnings management pre- and post-International Financial Reporting Standards (IFRS). For a large balanced panel dataset of Taiwanese electronics companies over 2007–2017, we replace returns on assets in an augmented modified Jones model with efficiency scores derived using data envelopment analysis (DEA). Using DEA as an innovative adaptation in the accrual-based earnings management model, we aim to provide an accurate measure of earnings management. The results of our panel-estimated generalized least square (EGLS) regression models, which account for heteroskedasticity and auto-correlation problems, indicate that the proportion of board of directors with financial and/or accounting experiences reduces earnings management pre-IFRS. However, their ability turns weaker post-IFRS. Overall, this study thus not only has important theoretical significance in that a board of directors with financial experience might and might not curb earnings management but also has an important practical contribution to decision-makers in companies regarding the effectiveness of board financial experiences in the IFRS era.

EXAMINING THE NEXUS BETWEEN CORPORATE SOCIAL RESPONSIBILITY DISCLOSURE AND EARNINGS MANAGEMENT: EVIDENCE FROM THE STATE-OWNED ENTERPRISES OF BANGLADESH

Purpose- The purpose of the study is to examine the association between corporate social responsibility (CSR) disclosure and the practice of earnings management in the listed state-owned enterprises (SOEs) of Bangladesh. Methodology- All the listed SOEs (17 firms) of Dhaka Stock Exchange (DSE) for the years 2017-2022 were considered in the study, resulting in observations of 102 firm-years. Content analysis was used to assess the level of CSR disclosure in the annual reports. For measuring earnings management, Beneish M-score model was used as the proxy variable. To investigate the association between CSR disclosure and earnings management, multivariate regression analysis was conducted using pooled OLS model, random effects model and lag model. Findings- The regression outcomes of the study found a positive and significant association between CSR disclosure and earnings management. This study shows how managers can use CSR disclosures as a competitive advantage by manipulating earnings while also fostering positive relationships with stakeholders. Conclusion- Investors and governments alike are increasingly demanding ethical business practices and full disclosure from corporations. The study concludes that managers' opportunistic behavior is a primary motivation for using CSRD to cover their tracks. This study will provide valuable insights to the policy-makers, regulators, investors and other stakeholders on how CSR reporting can be used as a medium to hide management’s manipulative practices and, why it is important to implement a more comprehensive guideline on CSR reporting and effective governance to eliminate such practices.

THE EFFECT OF GOOD CORPORATE GOVERNANCE AND CORPORATE SOCIAL RESPONSIBILITY ON FINANCIAL PERFORMANCE

Companies engage in CSR and GCG activities because they believe it will improve their financial performance. Income uncertainty as an impact of pandemic makes it interesting to examine how company will operate throughout 2019-2021. This study uses data on financial dan sustainability reports from five sectors of manufacturing companies. The proportion of institutional ownership and independent commissioners, as well as the audit quality, are used to calculate GCG. The disclosed activities in SR are measured for CSR. The modified Jones model is used to measure earnings management. ROA, EPS, and Tobin's Q are used to measure financial performance. PLS method and WarpPLS v.8.0 was used to examine the hypotheses in this study. The study’s findings demonstrate that GCG significantly affect financial performance and earnings management. CSR has a substantial effect on financial performance while having no effect on earnings management. Earnings management have no significant effect on financial performance. Meanwhile, earnings management is considered unable to mediate the effect of GCG and CSR on financial performance.

Identifying Fraud Financial Reports Based on Signs of Income Management Using Machine Learning Technology: The Case of Listed Companies in Vietnam

This study aims to use a measure of earnings management to predict companies whose financial statements have problems. This is an identification measure other than common measures to predict financial statement fraud such as measuring by the M-Score or the Z-score model that many previous studies have applied. In the income management measure, the author uses a measure of abnormal cash flow and abnormal expense flow to consider whether the corporate financial statements have problems or not. To do this, the author uses data from listed non-financial enterprises in the period from 2018 to 2022, with machine learning and deep learning algorithms, of which we focus on three main algorithms: ANN, SVM and RF. The results show that identifying problematic financial statements based on abnormal cash flows is quite effective with an accuracy of over 78% for the SVM method, while if using the RF method, the accuracy reaches over 82% but it is required to accept an increased processing time.

Examining the influence of corporate social responsibility performance on earnings management: A global perspective in the context of sustainable development

AbstractThis article examines the relationship between corporate social responsibility and earnings management behavior around the world. Using international data from 35 countries between 2003 and 2019, we find evidence that increased corporate social responsibility tends to mitigate the pressure to manage earnings. These findings are robust to alternate measures of earnings management, corporate social responsibility, as well as controlling for endogeneity caveats by two‐stage‐least square and system generalized‐method‐of‐moments estimations. We further show that the negative association between corporate social responsibility and earnings management is more pronounced for firms in countries with high press freedom or high societal trust. The findings from this article provide implications for investors, analysts, business participants, and regulators.

Earnings quality and national IPO: AEM practices of Central Asia

Once the key insights of corporate finance quality in Kazakhstani listed state SOEs are obtained, it is time to turn to separate strategies of corporate reporting manipulations. The purpose of this research is to look at accrual-based AEM strategies that adjust real activity REM practices at year-end. We follow Kasznik cash flow model for accrual-based earnings management as a best practice methodology and apply it to 572 unbalanced panel firm-year non-financial observations over 13-year time horizon. To strengthen our analysis, we compare main results with another popular measurement of accrual-based Earnings management based on the Shivakumar 1996 model. We also winsorised key investment indicators to reduce the impact of outliers on the main results. The results answer major questions: 1) what AEM strategies state SOEs prefer; 2) how accrual-based manipulations affect the choice of investment indicators; and 3) whether partially-privatized state SOEs under/over perform private POEs in Kazakhstan. In terms of theoretical and practical implications, our research findings could be useful to analysts of various strategies in the AEM/REM dimensions, academic scientists and advocates of partial privatization of state companies. We assure that theoretical gaps of corporate data manipulations in Central Asian context are to be reduced with increasing number of publications in the field of AEM practices.

Detecting Earnings Management And Earnings Manipulation In Indonesia: A Panel Data Analysis

This research aims to measure the quality of profits in non-financial sector companies in Indonesia regarding the extent to which the Company's financial reports are trustworthy to stakeholders. In this research, discretionary accruals are an indicator for measuring earnings manipulation, and non-discretionary accruals are an indicator for measuring earnings management. Secondary data is from annual reports of non-financial sector companies on IDX in 2020-2022. The sample for this research is non-financial sector companies, including the raw materials, manufacturing, and service sectors. Our research uses a modified Jones Model to estimate earnings management and earnings manipulation. The data analysis technique uses panel data regression. The research results show that the value aspect of discretionary accruals significantly influences total accruals. In contrast, the value of non-discretionary accruals does not significantly impact total accruals. This research is expected to help auditors, users of financial reports, and accounting standards bodies identify companies that fraud.

Targets’ earnings management and ownership decisions in M&A: Can less be more ?

In a sample of 1,097 European merger and acquisitions (M&A) deals, we find that the targets exhibiting higher levels of accruals earnings management (AEM) relate to lower ownership stakes offered by acquirers. Real earnings management (REM) measures do not relate to ownership decisions. This research contributes to broadening our knowledge about accounting information's role in the intricacies of M&A negotiations.

Accrual and real earnings management by rumored takeover targets

In this study we find evidence of income-increasing accrual and real earnings management occurring up to two quarters prior to the initial publication of a takeover rumor. We also find that post-rumor earnings management depends on both its form (accrual or real) as well as whether the rumor eventuates, observing income-decreasing accrual earnings management when the rumor is not accurate. Moreover, cumulative measures of earnings management for the month prior to the rumor are significant predictors of rumor accuracy, while being negatively correlated to rumor date and long-run returns. We interpret results as being consistent with rational expectations theory and note how managerial motivations may adapt to the degree of takeover likelihood.

Earnings Management and Financial Performance of Quoted Non- Financial Firms in Nigeria

This study investigates the relationship between earnings management and the financial performance of listed firms in Nigeria. Using secondary data over the period from 2005 to 2020 of 76 firms listed on the floor of the Nigerian Exchange Group (NXG), the generalized method of moments (GMM) results reveal that while two of the measures of earnings management (Jones’ Model and Kazsnix’s Model are positively significant with firm performance (ROA); the remaining six measures (Modified Jones’ Model of Dechow et al; Kothari’s et al Model; Larcher and Richardson’s Model; Key’s Model; Dechow-Richardson-Tuna’s Model and Kangsiv’s Model) are negatively and statistically significant with firm performance (ROA). The study concludes with some recommendations.

Impact of Ownership Structure and Corporate Governance on Earning Management

Purpose- This study investigates the interplay among Ownership Structure, Corporate Governance, and Earnings Management by employing ordinary least square (OLS) regression. To find the relationship among the three constructs based on data sourced from listed companies on the Pakistan Stock Exchange spanning 2016-2021 were used, excluding the financial industry due to its unique reporting system.Design/Methodology- The sample comprises 111 firms chosen based on data availability. To measure earnings management, the researchers used a modified version of John's model (1995) to estimate discretionary accruals. Findings- The study's key findings include the significant role of institutional investors in reducing earnings management. The number of board directors and ownership concentration were observed to impact discretionary accruals. Control variables indicated that more profitable, growing, and highly leveraged firms tend to engage in earnings management, which decreases with the firm's age. The study revealed a diverse relationship between ownership structure, corporate governance codes, and earnings management. Notably, significant institutional investment reduces ownership concentration, leading to decreased earnings management. Moreover, the results show a positive and significant correlation between firm size and Return on Assets (ROA). Practical Implications- Board independence was found to have a positive impact on earnings management, suggesting that boards serve a more complex role than mere monitoring to mitigate accounting manipulation.

CEO Compensation and Earnings Management-The Moderating Role of COVID-19 Pandemic: Evidence from Bangladesh

This study examines the impact of CEO compensation on earnings management and the moderating role of COVID-19 pandemic on this connection using accrual and real earnings management techniques in an emerging economy context. The annual reports of non-financial enterprises in Bangladesh from 2011 to 2021 have been analyzed in order to compile the data being collected. The methodologies of accrual and real earnings management are utilized in the beginning stages of the study in order to measure earnings management. Following this, the research employs the ordinary least square model in order to determine the findings of the regression. According to the findings of the study, there is a negative correlation between the compensation of CEOs and both accrual and actual earnings management. In addition, during the COVID-19 pandemic phase, businesses had a tendency to participate in real earnings management less frequently than they did before the pandemic outbreak. It is interesting to note that the data underline the fact that CEO compensation and the COVID-19 epidemic combined have a favorable impact on real-earnings management. The findings of the study make a contribution to the existing body of literature on corporate governance by offering insights into the influence that CEO compensation has on earnings management. It is anticipated that the findings of the study will be helpful for corporate policymakers in the process of formulating policies that are suited for lowering the earning management strategies that are utilized in businesses.

Transaction cost analysis of corporate sustainability: The influence of profit management, audit committee, and women board directors

The main criterion of a company is its financial performance. The purpose of this study is to examine the impact of Profit Management, Audit Committee, and Female Director Characteristics on firm sustainability as measured by financial performance at companies in the real estate construction sub-sector listed on the Indonesia Stock Exchange. Profit Management, Audit Committee, and Female Director Characteristics are independent factors, while company sustainability is dependent. Financial performance is the control variable. Discretionary Terms Net Profit - Cash and Cash Equivalents / Total Assets t-1) is used to measure earnings management, while ROA (Return on Assets) is used to measure financial performance. The data used in this study are secondary. The subjects of this study include 17 companies in the real estate construction sector listed on the Indonesia Stock Exchange. Purposive sampling was used to collect data for this study and data were obtained from eight companies. Classical hypothesis testing, multiple linear regression testing, coefficient of determination testing, path analysis and hypothesis testing are the analytical methods used. Based on the results, it can be concluded that earnings management has a positive and significant impact on financial performance; Audit committee has a positive and significant impact on financial performance; Characteristics of female directors have a positive and significant impact on financial performance; financial performance has a positive and significant impact on corporate sustainability; and financial performance can mediate the relationship between financial performance and corporate sustainability. Accordingly, strengthening earnings management, audit committees and the special role of female directors must be considered to improve a company's financial performance. Earnings management, audit committees and the characteristics of good female directors can then improve corporate sustainability. It will be higher if supported by strong financial performance. Earnings management, audit committees and female director characteristics can be optimized if supported by good financial performance.

The Influence of Cash Flows Volatility on The Relationship Between Leverage and Accruals Earnings Management

This study examines how cash flow volatility affects leverage and accruals earnings management. The research objective achieves by analyzing a sample of non-financial Pakistani enterprises from 2004 to 2018. The paper examines leverage and earnings management in business risk, specifically cash flow volatility. The leverage includes short term, long term, and total debt, while cash flows volatility is used as business risk. The earnings management level is measured by accruals earnings management also by using John Modified Model that suggests measuring earnings management approach by using discretionary accruals. This analysis uses agency and positive accounting theory. This study uses two-step system Generalized Method of Moment (SYS-GMM) dynamic panel estimators to examine leverage and earnings management. The study also examines how business risk affects this relationship for Pakistani enterprises. Endogeneity between variables motivates the adoption of SYS-GMM. The study found that leveraged managers use accruals earnings management. Leverage and accruals earnings management are positively correlated. The firm managers deliberately eschew accruals-based earnings management and leverage long-term debt. This choice is predicated on the unfavorable link between long-term debt and accruals earnings management. The leverage impacts negatively on accruals earnings management in the presence of cash flows volatility that discourage the managers to manipulate the financial statements. When seeking external finance, managers are less likely to use accruals-based earnings management when facing cash flow instability.

CEO age, financial reporting quality, and the role of clawback provisions

Purpose Motivated by rapidly increasing CEO age in the USA, the purpose of this study is to analyze the effect of CEO age on financial reporting quality and consider the moderating role of clawback provisions. Design/methodology/approach This study uses a data set of 18,492 US firm-year observations from 2003 to 2019. Financial reporting quality is proxied with accruals-based and real activities earnings management measures, and with financial statement irregularities, measured by applying Benford’s law to financial statement line items. A number of sensitivity tests are conducted including the use of an instrumental variable. Findings The results provide evidence that financial statement irregularities are more prevalent when CEOs are older, and they suggest a complex relation between CEO age and real activities earnings management. The results also suggest that the effect of CEO age on financial reporting quality is moderated by the presence of clawback provisions which became mandatory for US-listed firms in October 2022. Originality/value This study is the first, to the best of the authors’ knowledge, to consider the effect of CEO age on financial statement irregularities and earnings management. This study has important implications for stakeholders evaluating the determinants of financial reporting quality, for boards of directors considering CEO age limitations and for policymakers considering mandating clawback provisions, which recently occurred in the USA.

Institutional monitoring on corporate earnings: Evidence from U.S. Cross-listed Firms

Existing research on the effectiveness of institutional monitoring internationally highlights the advantage domestic investors hold due to their geographic proximity to the invested firms. We revisit the topic by examining a unique setting: the U.S. cross-listing market. U.S. institutions as foreign investors may benefit from their market proximity because cross-listed firms are traded in the United States and must adhere to U.S. regulations and listing requirements. Using earnings management as the proxy for monitoring effectiveness, we find that only the ownership of home institutional investors is negatively associated with earnings management, suggesting that the market proximity advantage enjoyed by U.S. institutions is not enough to overcome the disadvantage related to their geographic distance from the invested firms. This finding holds across alternative measures of earnings management and remains robust when addressing endogeneity concerns in the model specification. Thus, our results have important policy implications.